Coronavirus dominates the US election campaign
US President Donald Trump has been infected with COVID-19. This has put a new spin on the US election campaign as it enters the finishing straight – at least at first glance. In fact, last week’s televised debate had already pointed the way to the likely result.
A scriptwriter could barely have dreamt this one up. Just a few days after the first televised debate between US President Donald Trump and his Democrat challenger Joe Biden, Trump announced on Twitter that he and his wife Melania Trump had tested positive for COVID-19. Only a matter of hours beforehand, in an address to a charity dinner, he had said that the end of the pandemic was in sight. Once the US President was admitted to the Walter Reed military hospital last week, it became clear that his participation in key election campaign events would probably now be greatly restricted. Instead Trump is likely to tweet more, which will make the campaign even more unpredictable.
Cavalier approach to coronavirus in the political apparatus
The markets were initially rattled: Futures on the S&P 500 index fell by more than 1 per cent in the first round of reactions, while the VIX, an index that measures volatility, jumped by 10 per cent briefly.
The president’s positive test result is likely to extend Joe Biden’s lead in the polls. Trump has already come under fire for his policy of playing down the pandemic for months on end. The fact that he has now been infected himself will throw a spotlight on the White House’s cavalier approach to COVID-19. The entire leadership team could now end up with the virus. This would make Trump’s COVID-19 infection a question of national security, which partially explains the initial market reactions.
TV debate: insults flying – a chance missed
Two days earlier, during the first TV debate, the US President passed up an important opportunity to sway undecided voters. The ‘Shouting Match’ is how Spiegel Online titled an article on this televised duel between Trump and his Democrat challenger Joe Biden. Trump constantly interrupted his rival. This meant that Biden did not need to show any great rhetorical skill to be declared the winner, and it did not make a Trump victory on 3 November more likely.
The uncertainty factor of misleading polls
The 2020 election campaign differs from the one in 2016 in several ways. For example, the percentage of swing voters stood at around 15 per cent back then, whereas this year only 6 per cent are undecided. In 2016, many of the swing voters only opted to vote for Donald Trump on election day itself. The potential for a last-minute Trump surge is therefore lower this time.
In addition, the quality of the polling is likely to have improved compared with 2016. In the last election, there was a skew in the forecasts for the key battleground states that was related to how the polls were designed. Furthermore, a Democrat victory was seen as a safe bet in the Blue Wall states of Pennsylvania, Wisconsin and Michigan, which meant that the polling carried out there was of a lesser quality. Trump ended up winning all three.
Both these issues have been addressed in the design of the polls used this year. This should make their predictive power in the race for the White House better than in 2016.
Implicit odds of winning
Modest uplift for equities if Biden wins
Our baseline scenario therefore remains a Democrat sweep in which Joe Biden wins the presidential election and the Democrats secure a majority in the House of Representatives and the Senate. This is what would need to happen for Biden to be able to properly implement his agenda.
Even though a Biden victory could trigger short-term falls in stock prices, a Democrat sweep would – in the medium and long term – probably give a modest uplift to equities. This is because the less harsh trade rhetoric would likely reduce spreads in the markets. Equity market volatility should be lower and price/earnings ratios higher, while structurally stronger economic growth should comfortably offset the negative effects on corporate profits of the Democrats’ planned tax increases. In our view, weaker share prices before or shortly after the election would therefore be a buying opportunity.
The less harsh rhetoric against China will probably be somewhat detrimental to ‘safe havens’ such as US Treasuries and gold. US Treasuries would also be adversely affected by higher fiscal spending – as planned by the Democrats – and the subsequent potential for higher inflation. The implications for the US dollar in this scenario would be slightly on the negative side as well. This is because there would be a lower level of repatriation of overseas profits and an easing of political tensions in international trade.
2020 US presidential election roadmap
As at 5 October 2020